Moody's downgrades Reynolds

Moody's Investors Service said it downgraded Reynolds American Inc.'s senior debt to Baa3 from Baa2. This concludes the review that began on July 15, 2014 following the company's announcement of its intention to acquire Lorillard, Inc. for about $27 billion. The outlook is stable.

"The downgrade reflects our expectation of much higher leverage as a result of the transaction as well as execution risk in achieving synergies in a timely fashion," Nancy Meadows, a Moody's vice president and senior analyst, said in an agency news release. "We think the strategic rationale for the combined company is sound and there are likely to be meaningful synergies, which will bring credit metrics back into a range appropriate for an investment-grade rating over the next 12 to 18 months."

The agency said the Baa3 rating reflects the company's concentration in and secular volume decline of cigarettes, the ongoing regulatory and excise tax risk faced by U.S. tobacco companies and the incremental litigation risk Reynolds will assume as part of the acquisition of Lorillard.

At the same time, the rating reflects the company's strong margins and cash flow, Moody’s said.

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